Guidance for Employers on Handling Insurance Plan Distributions

Employers sponsoring group health plans often face times when they receive a rebate of premium dollars from the insurance carrier or, in the case of a self-funded plan, have excess plan funds. Employers need to understand their obligations as a plan fiduciary and whether they must distribute any part of the funds to plan participants.

Over the years, we’ve seen an increase in the number of questions from employers regarding premium rebates, holidays, and discounts concerning compliant options for distribution. Likewise, we are also seeing more questions from employers with self-funded health plans on handling distributions of excess plan funds. Legislation and regulation of the fully insured marketplace increases the likelihood that employers will receive these monies. The ACA, along with response to the volatility and cost of medical goods and services, drives the frequency with which these rebates or excess funds present themselves.

The MLR provision of the Affordable Care Act (ACA) requires insurance carriers to spend at least 80% of premium dollars from individual or small group plans on health care-related expenses and 85% on large group plans. Health care expenses include reimbursements for clinical services and expenditures to improve health care quality. If they don’t, the excess is returned to the policyholder, i.e., the employer in the case of a group health plan. If carriers do not meet this minimum ratio, they must issue a premium rebate to policyholders by no later than September 30 each year.

Employers with self-funded plans obtain premium contributions from employees who participate in their health plans. Often, the contributions exceed the actual expenditures. With the help of plan advisors and actuaries, employers may determine that it is appropriate to distribute some excess funds. Additionally, employers ending a self-funding arrangement or moving from one administrator or plan to another may need to reconcile excess funds that remain in the terminating plan.

Distribution of Health Plan Funds

Group insurance policy dividends, refunds, and credits can be plan assets in whole or in part for Employer Retirement Income Security Act (ERISA) purposes. Distributions are considered ERISA plan assets to the extent they are attributable to participant contributions. Employers should not automatically assume that the business gets to keep the full refund or credit amount.

What should employers do?

1. Determine what part of the funds are plan assets.

   Any part of the refund or credit attributable to participant contributions will belong to the plan. Participant contributions are always recognized as plan assets per the Department of Labor (DOL) and if premiums are paid, in whole or in part, by participant contributions, an allocable portion of the distribution will be considered plan assets.

   • Premiums paid solely by participant or premium contributions held in a trust

     all funds are plan assets

   • Premiums paid solely by employer

     funds are not plan assets unless the plan document states otherwise

   • Premiums paid by both participant and employer

     a portion of the funds are plan assets, either proportionately or as indicated in the plan document

2. Review plan documents and other employee communications

   to determine how the plan may govern plan assets and their distribution. This will limit just what employers may do with the funds. Other communications may include the Summary Plan Description (SPD), open enrollment materials, employee handbook, and communications from the Department of Health and Human Services (HHS) and insurance carriers regarding MLR payments.

3. Evaluate options for fund distribution.

   The DOL provides guidance to employers on allowable methods of distributing plan assets. Employers must review the circumstances and determine the appropriate method of distributing fund to the participants.

What are the fund distribution options?

ERISA’s exclusive benefit rule states that "the assets of a plan shall never inure to the benefit of an employer and shall be held for the exclusive purpose of providing benefits to participants in the plan and their beneficiaries and defraying reasonable expenses of administering the plan.” Essentially, plan assets must be used exclusively to provide benefits to participants or for offsetting reasonable costs to administer the plan.

The DOL provides that where MLR rebates are considered plan assets, the plan fiduciary must:

• Cash

  Distribution of funds. These can be provided to both current and previous plan participants. Be aware though, if premiums were paid tax-free, through a cafeteria plan, as this would result in taxable income.

• Offsets

  Provide alternatives to upcoming premium payments. Examples include premium holidays, discounts, etc. These can only be provided to current plan participants.

• Enhancements

  Providing new benefits or improving the existing benefits. Examples include adding accident, dental, or vision plans or other welfare benefits or making contributions to an HSA or wellness program. These can only be provided to current plan participants. [This option generally does not apply to plans that have not established a trust for premium contributions, per ERISA section 403(a).]

  For plans that are exempt from ERISA's trust and annual audit rules (i.e., unfunded group health plans that are insured), the DOL allows plans to remain exempt from ERISA's trust, annual audit, and reporting requirements if the plan assets are used within 3 months of receiving the MLR rebate either as a distribution of the rebate amount to participate in cash or a reduction of the participants' share of premiums.

Additional Information

The ACA requires insurance carriers to submit reports by July 31 of each that detail whether the insurance carrier met the MLR ratio requirement for the prior calendar year. If thresholds aren’t met, the insurance carrier must issue rebates no later than September 30. Carriers may provide a lump sum reimbursement or apply to the first month’s premium due on or after September 30. Two common tactics used by employers are premium holidays or discounts, which allow them to directly allocate dollars representing plan assets towards employee premium contributions.

For more information on this topic, visit our blog post What is Medical Loss Ratio (MLR) and How Do You Handle MLR Rebates?